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David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures. Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions. Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

On Hucksters

I get my share of requests for help. Some are from naive friends (but not so naive that they don’t ask me) are solicited on Nigerian scams. A few quick analyses, and I can tell them: don’t do it. This is a scam.

Then there are people who trot a business idea past me. Some of the ideas sound pretty good, but upon further examination, I wonder why it hasn’t worked so far. Probing that, the answer is that “business partners failed me.” Mmm… I can understand that once or twice but when it repeats, it makes me look at the entrepreneur.

There was one guy who had a compelling idea regarding health insurance that I thought was promising, and so I let him into my network of contacts, while saying to them “This might be promising or not. There are some good ideas here, but he is too certain of his views, and that worries me.” A variety of talented executives looked at his idea, and passed. A friend of mine gave it some attention, thought it had promise, and he met with him, worked with him, but he proved unstable. In the end, he blamed us.

That typifies hucksters. Someone else is always to blame, and they have this great untapped concept, but no one will help fund their genius.

So now, I have a client who approached me regarding an investment in the energy sector pitched to him by a friend. I help my clients. If they have investment issues away from me, I will take some time to give them my opinion.

But here’s the problem:

The illustrated returns are too good to be true.

The CEO has no experience operating an energy company.

The CEO’s career has gone here and there, but has not amounted to much, such that he can’t fund a $500K project on his own.

All of the helpers/directors in the illustration document have other jobs now, and may or may not be available to help if the project develops.

Some of them have overstated their resumes, or have stated things that can’t verified.

Some board members are questionable.

The opportunities, if true, are of a reasonable size such that small cap public E&P companies could take advantage of the opportunities.

The core idea is that there are a lot of small lazy oil producers who are unwilling to invest to improve output.

The pitchbook mixes in gold mining and clever trading of energy contracts — those are different businesses. I want developmental stage businesses to focus.

If the first opportunity costs only$500K, you mean the whole group of interested parties doesn’t have $500K to invest? I don’t want to invest where the management/board is not invested to the hilt.

I don’t see this as a valid concept, and will tell my friend/client to not invest.

All that said, I want to say to all my readers that good investing considers uncertainty, and focuses on the possibility of loss. Bad investing focuses on possible gains.

Good investing sardonically asks “Why am I the lucky one?” There are a lot of Baby Boomers out there who have not done well, and are looking for one miraculous venture to give them the retirement that they dreamed of. They will take chances with the money of others that they would never do with their own.

To my readers: be wary of private investment opportunities. Beware of those that are very certain they will succeed, but they need your money to succeed. The certainty is incompatible with the request for external funds in most cases.

Hucksters are always certain; good investors are skeptical.

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About David Merkel

David J. Merkel, CFA, FSA, is a leading commentator at the excellent investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited David to write for the site, and write he does — on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, and more. His specialty is looking at the interlinkages in the markets in order to understand individual markets better.
David is also presently a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. He also manages the internal profit sharing and charitable endowment monies of the firm.
Prior to joining Hovde in 2003, Merkel managed corporate bonds for Dwight Asset Management. In 1998, he joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life.
His background as a life actuary has given David a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that David will deal with in this blog.
Merkel holds bachelor’s and master’s degrees from Johns Hopkins University. In his spare time, he takes care of his eight children with his wonderful wife Ruth. View all posts by David Merkel →